Arbitration and Bankruptcy

Normally, arbitration comes up in the context of personal injury cases. A good example is one of the most common instances of arbitration language, which is in nursing home admittance paperwork. The nursing homes include language requiring arbitration, which shields the nursing home from the public, lengthy, expensive and uncertain courtroom litigation process and instead allows them much greater control by requiring all potential plaintiffs to bring their disputes before an arbitrator. This has come under attack in recent years, as many argue that arbitration clauses, especially arbitration clauses that restrict consumers, are unfair.

What about arbitration clauses in a commercial setting, business-to-business? Those situations typically receive far less scrutiny. One recent dispute regarding the validity of an arbitration clause arose in the context of a bankruptcy case. The issue was whether arbitration provisions could be enforced in a bankruptcy proceeding. The answer, at least according to the U.S. District Court for the Eastern District of Arkansas, is yes.

The case at issue arose when Turner Grain Merchandising, a grain broker that buys and then resells corn, rice and soybeans, ran into financial trouble. Turner filed for Chapter 11 protection, in an attempt to resolve its liquidity crunch, but failed to find a solution, ultimately needing to file for Chapter 7 protection. Once Chapter 7 was filed, a trustee was appointed to oversee the case and recover as much money as possible to benefit Turner’s creditors.

Among many other actions, the trustee filed suit against Gavilon Grain, alleging the company breached its contract with Turner by failing to pay for millions of dollars worth of corn that had been delivered to Gavilon. In total, the trustee argued Gavilon owed approximately $14 million to Turner, money that the trustee hoped would be distributed to Turner’s creditors.

In response, Gavilon argued that there had been no breach of contract and, what’s more, the case should be removed from court and instead sent to arbitration. Gavilon pointed to the underlying contracts signed with Turner, which included a requirement that any and all disputes raised relating to the agreement be arbitrated by the National Grain and Feed Association. The bankruptcy trustee argued that the action was a core part of the bankruptcy case and thus should fall within the bankruptcy court’s exclusive jurisdiction.

The bankruptcy court sided with the bankruptcy trustee, despite the seemingly clear language of the arbitration provision. The court held that the dispute could and should be heard before the bankruptcy court, not by a separate arbitrator. Gavilon then appealed and the District Court reversed, ruling that the claims should be sent to the National Grain and Feed Association for arbitration. According to the District Court, federal policy generally favors arbitration and the Supreme Court has generally upheld such language in other commercial disputes. Additionally, there is no indication that Congress intended to eliminate arbitration as a possibility for companies under bankruptcy protection. Without such evidence, an ordinary commercial dispute like this one is better off left in arbitration, as the original agreement required.

Going forward, many believe this case will bring more clarity to the issue of arbitration in a corporate bankruptcy setting. Arbitration provisions that have been included in underlying commercial agreements appear likely to be upheld by bankruptcy courts, meaning those who go to the effort to include them in agreements shouldn’t worry about being undermined by courts.

If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.